Ethnic Diversity on Canadian Boards

Examinations of board composition in public companies focus on the absence of women but rarely on the absence of visible minority directors (VMDs). In countries such as Canada, the United States and Australia, where visible minorities contribute significantly to GDP and represent a high growth segment of the population, a question arises as to whether boards should bear some demographic similarity to the society in which the firm operates. In order to understand board composition and its potential impact on a firm’s performance, more information is required about the complement of VMDs on boards of directors. We seek to fill this gap in the literature.

“Diversity” in the corporate context refers to the composition of the board, taking into account individual characteristics of board members, such as gender, race, disability, age and ethnicity. The relative paucity of women on boards has dominated the academic debate (Francoeur et al, 2007; Terhesen et al, 2009; Peterson and Philpot, 2006) with visible minority representation falling a distant second (Brammer et al, 2007).[1] We begin by questioning this divide in the literature and argue that characteristics other than gender are relevant to the discussion about board diversity. Indeed, the aim of this study is to provide a deeper look at board composition by examining VMDs and subgroups of VMDs.[2]

To this end, we are analyzing board composition and performance of sample firms listed on the Toronto Stock Exchange as well as visible minorities in the graduating classes of director programs (DPs) in Canada. Our preliminary analysis indicates that the representation of VMDs on boards and in DPs is less than 5.5 percent in both cohorts (and less in the TSX group of companies if six foreign-owned firms are excluded). Certain visible minority groups, including those from South Asia, are more prevalent on public company boards than other visible minority groups, such as Aboriginal peoples. Finally, firms in consumer-based industries (such as financial services) demonstrate a higher propensity than other industries (such as mining) to place VMDs on their boards.

We believe that additional attention should be paid to potential contributions that VMDs can make to corporate boards. Building on Becker (1957), we hypothesize that VMDs may bring specific advantages to the firm and as a result firms will be at a competitive disadvantage if firms fail to hire these directors. Specifically, VMDs may have a unique ability to understand diverse labour and consumer markets, to provide access to untapped and new networks, and to exercise useful approaches in negotiations around the boardroom table.

Our data is useful for lawmakers who are currently considering the question of board diversity, including whether to compel boards to appoint a minimum number of women to the board. In this regard, we note that some countries (such as Norway, Germany, France, Iceland and Spain) have implemented mandatory gender but not visible minority quotas, which may simply be because visible minorities constitute a very small percentage of the overall professional cadres in these countries. Other jurisdictions have implemented a less strict approach. For example, nine Canadian provinces recently adopted a “comply and explain” approach under which public corporations must disclose whether they have a written policy relating to the nomination of women directors, whether they have targets for getting more women on their boards and measures taken to ensure that the policy has been effectively implemented. If the corporation does not consider the representation of women on the board in its nominating process, or has not adopted a target, it must disclose its reasons for not doing so.[3]

While legislative initiatives across the globe seek to increase the representation of women on boards, they generally do not address the paucity of VMDs. It may be that the legislation is likely a response to empirical data that evidences a low percentage of women on boards. For example, Catalyst found that women on corporate boards in U.S. public companies increased from 10.3 percent in 2011 to 12.1 percent in 2013 (Catalyst, 2014; see also Peterson and Philpot, 2006). The number of public companies with no women board members was about 50 percent. By industry, firms in the mining and oil and gas sectors had just 7 percent of women on their boards while utilities had 23.2 percent (Catalyst, 2014; see also Arfken et al, 2004). Our efforts are complementary to this research in that we seek to provide data on the numbers of VMDs as well as the types of companies that are more or less likely to have VMDs. We also examine the issue of the relationship between firm’s performance and board composition and find that firms with boards comprised of only white males do not perform significantly better than firms with VMDs and females on their boards. We believe that the current policy discussion regarding board composition will be better informed with empirical data such as.

In our more detailed paper, we note that that our primary motivation is to respond to the descriptive question of the complement of VMDs on corporate boards. We do not address the normative question of whether companies should, from an ethical standpoint, increase the number of VMDs on their board, though our study has implications in this regard. To our knowledge, there is no academic research on the presence of VMDs on Canadian public company boards or on the relationship between VMDs and firm performance, which is a gap that this study assists in filling.

Anita Anand is a Professor of Law and Academic Director at the Centre for the Legal Profession and Program on Ethics in Law and Business, University of Toronto, Faculty of Law.

Vijay Jog is the Chancellor Professor at the Sprott School of Business at Carleton University.